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FATCA and other year-end global information reporting considerations

INSIGHT ARTICLE
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October 11, 2016

Aureon Herron-Hinds

As we move past certain tax filing deadlines and towards year-end planning, taxpayers should be aware of several important global information reporting and tax withholding considerations for year-end. These include:

Review and update FATCA classifications – To the extent that you have acquired new entities or restructured during the year, you may need to register these entities with the IRS in order to timely comply with the Foreign Account Tax Compliance Act (FATCA) going forward. Companies should also evaluate the impact of changes to your structure on the FATCA status and year-end filing obligations of other entities in the group. Ongoing monitoring of your structure with timely registration and deregistration of entities as required will ensure sustained compliance with the rules going forward.

Prepare for CRS reporting - Reporting under the Organisation for Economic Co-operation and Development (OECD)’s common reporting standard (CRS) commences in 2017. Your organization may therefore need to assign a CRS classification to legal entities in the group and determine whether they are residents of any one or more of the 90+ countries that have agreed to report information under the automatic exchange of information (AEoI) provisions of CRS. Note that while most entities classified as foreign financial institutions (FFIs) under U.S. FATCA regulations will likely be FFI’s for CRS reporting purposes, there are differences in definitions that may impact your classifications and ultimately, your reporting obligations. Drill down on what those differences may mean to your organization now to avoid surprises in 2017.

Register sponsored entities – In Notice 2015-66, the IRS extended the status of limited FFI’s, limited branches and sponsored entities without global intermediary identification numbers (GIINs) until Dec. 31, 2016. These entities must now register and obtain GIINs before year end. This deadline is particularly important for private equity firms and other asset managers who may have taken advantage of the sponsored entity concept for administrative ease on funds with several portfolio entities in their structures that they did not previously register.

Specifically, sponsoring entities must register their sponsored investment entities and sponsored controlled foreign corporations (CFCs) covered by Annex II of a Model 2 IGA on or before the later of Dec.31, 2016 or the date that is 90 days after a U.S. reportable account is first identified. Sponsoring entities must also register their sponsored registered deemed-compliant FFIs and sponsored direct reporting NFFEs by Jan. 1, 2017. If you are affected, consider registering to obtain GIINs well in advance of Jan. 1, 2017, to give withholding agents sufficient time to complete their internal GIIN verification processes.

Replace pre-FATCA W-8s – The ability to rely on old versions of Forms W-8 collected pre-FATCA expires on Dec. 31, 2016. To avoid potential exposure for under withholding on payments associated with expired W-8 Forms, withholding agents will need to develop a process for collecting, reviewing and storing new forms for customers, vendors and investors.

Modify systems and processes for new Form 1042-S – The IRS has released a new Form 1042 and 1042-S for 2016 with new fields that may require you to collect additional data before year end to ensure that an accurate and complete return can be filed. Most significantly, new box 13j of the 2016 Form 1042-S requires a new limitation of benefits (LOB) code when a reduced treaty rate of withholding is applied. The new LOB code is assigned based on information from Form W-8. Modifications to your systems and additional processes may need to be developed before year end in order to capture LOB information from W-8 forms that must be reported on the new 2016 Form 1042-S. Don’t wait until year end to address these requirements. Modify systems and processes now so that you are prepared to meet the challenges of these new forms.

Reconcile tax deposits – Withholding agents should request IRS transcripts and reconcile amounts withheld per their books and records to actual deposits per the IRS’ records and address any discrepancies prior to year end. The IRS has indicated its intention to reject a larger number of refund claims this year. Additionally, new technology used by the IRS will allow for better matching of information (such as the recipient’s name or taxes withheld) per recipient copies of 1042-S to information in the Service’s systems or as reported by withholding agents.

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